Digital currency and nano-GPS in currency notes! A thread 1/n https://twitter.com/daamitt/status/1321060348011499521

There are broadly two types of CBDCs - Wholesale CBDC used only by Financial institutions and Retail CBDC. Let's explore the retail CBDCs - what's the difference between digital currency and money you see in your netbanking app? They are both digital. 2/n

Let's start with the difference between a ₹500 note in your hands vs ₹500 in your bank account. The note in your hand is direct liability of the central bank (RBI in our case). The value stored on that note is backed by the CB and the govt of the country. 3/n

The ₹500 in your bank account? Just a number! CB allows banks to create what is known as commercial money based on reserves kept at the CB by the banks. A bank will lend your ₹500 to another person/biz and now his bank account has ₹500 too. Just like that, there's ₹1000. 4/n

There are checks and balances but this is how CBs create commercial money (liquidity), aka fractional reserve banking. The ₹500 in your bank account is not a direct liability of the CB and hence not backed by the govt of the country. 5/n

If a bank goes under, you loose your money. You may get some of your money back because there is a bank deposit insurance program run by CB. But this is not the same as ₹500 note in hand. 6/n

Having ₹500 note in hand is powerful. Almost no-one can take that value away from you (unless someone physically steals it) and the CB uses this as a hedge against risk concentration in commercial banks. 7/n

Coming back to CBDCs, Retail CBDC is a way to make this ₹500 note in hand Digital. It will have the same support, backing and acceptance as a physical note but it's completely digital. Remember, this is different from the digital *representation* of money in your bank acct 8/n

Why? Several reasons to make currency digital
- physical currency has costs and overheads
- CB has no visibility into movement of physical currency
- tax evasion (remember DeMo?)
- digital money can be smart
- FOMO, every other CB seems to be doing it 9/n

IMO the main reason is simply this - everything that can be, will be digital in the future. Pokemon, Netflix, UPI, Cards, bank accounts have shown that customers increasingly prefer digital over physical. In hindsight now it's clear why movie streaming is better than DVDs. 10/n

CBs are just responding to a natural end-state where citizens will stop using physical notes just like they stopped buying DVDs. If the CB does nothing then the comm banks and Pvt companies (Libra) will give the solution and that's a risk to the sovereignty of a country. 11/n

Remember notes (aka physical cash) is empowering the citizens (especially unbanked)and de-risks any concerns wrt stability of the economy. This is what a digital currency solves for. It's not solving a current problem but responding to a future end-state. 12/n

Just like Netflix pivoted to streaming on noticing this trend to digital but Blockbuster went down. CB want the pivot before too much control goes away to commercial banks and Pvt companies 13/n

CBDCs themselves have a ton of challenges to address before they are considered feasible by the CB. One such problem is of Disintermediation - what roles will banks play, fractional reserve banking? List goes on. 14/n

This brings us to the ironically funny ending with Nano-GPS. Whatever form its takes, CBDCs will be smart by nature and integrated tightly with the ubiquitous Smart Phone and one of the first use of this will be to track the flow of cash with location data. 14/n

So the journalists who claimed that the new notes post DeMo are coming with a Nano-GPS chip may actually have been right all along, just ahead of its time. Ok, maybe it won't work 120m underground 15/15